NSE Trading Glitch: Traders with Cover Order can take a Hit

By | February 24, 2021 1:51 pm

2nd Time in India Stock market History Trading has been halted on the National Stock Exchange

NSE closed F&O market at 11:40 am & cash market at 11:43 am Rates on NSE stopped updating at 10:08 am

Trading has been halted on the National Stock Exchange since 11:40 pm as prices for the cash as well as derivatives segments were not updating for more than an hour.

The exchange has communicated to brokers that all pending orders in the system when trading was halted, will be cancelled, and fresh orders will have to be put in during the pre-open session.

Learning for Traders 

If today’s NSE GLITCH is making you  worried about your open positions, it means you do not have the Right “Position Size”. Traders who have the right positone size with 1-1.5% SL  are not going to lose Much. Remmber the Golden Rule its always your position size will decide your survial in Long Run.

Traders who have  put in COVER ORDERS with 5X to 10X Leverage  could be hit if the prices on resumption are below the stop loss (for traders with long trades) or above the stop loss (for traders with short trades).

What exactly are Cover Trades?

When Traders trade position in the stock market, they are required to pay a margin to the broker to ensure that risk involved with such trade is covered. The stock exchange also prescribes a minimum margin for trading position.

However, if Traders wish to pay a lower margin and consequently, raise the leverage of such trade, they can choose a Cover Order (CO).

This in-built risk minimisation mechanism allows traders as well as brokers to go for higher leverage when buying or selling assets such as Equity cash, Equity Futures & Options, Commodity F&O, etc. And because the risk associated with trading reduces, a cover order margin requirement is also low.

In essence, a Cover Order constitutes two components of trading

  • Initiating position (Market or Limit Order)
  • Stop Loss Order.

The SL order is essential and thus, compulsory to a Cover Order. It is placed simultaneously with a buy or sell order and cannot be cancelled later.

It is imperative to note that all Cover Orders must be squared-off before 3:20 p.m. every day or else an automatic square-off mechanism is triggered. Hence, this method of trading position is explicitly used by intraday traders.

How do cover orders reduce the risk for brokers and traders?

In simple terms, a cover order is a market order that is placed along with a Stop Loss order. You can use cover orders in case of long trades and in case of short trades too. The important part of the cover order is that it has to be placed along with the stop-loss order at the time of placement of the order itself. Once the cover order is placed, the SL order cannot be cancelled as it will make the entire concept of the cover order invalid. So what exactly does this cover order do?

Since the cover order includes the stop-loss order also at the time of order placement itself, it reduces the risk for the broker and for the trader.

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